What is the benefit of being classified as an S corporation rather than a C corporation?

Being classified as an S corporation provides the significant benefit of pass-through taxation. This means that the income, deductions, and credits of the corporation pass through to its shareholders, who report this information on their individual tax returns. As a result, the S corporation itself typically does not pay federal income taxes, thereby avoiding the double taxation that C corporations face, where income is taxed at the corporate level and again at the individual level when distributed as dividends.

This pass-through taxation structure allows shareholders to potentially lower their overall tax burden. Instead of being taxed on corporate profits and then again on any distributions, income is only taxed at the shareholders' individual tax rates, which can be advantageous for many business owners.

In contrast, while a lower tax rate is not unique to S corporations and typically varies by corporate structure or financial situation, S corporations inherently avoid the issue of double taxation. The limitation on the number of shareholders and requirements for tax returns do not apply in the same manner to an S corporation as they do to a C corporation, making the pass-through feature a defining advantage in choosing this classification.